My Options Trading Unlocked – Newsletter 01 Aug 2024

I hope this picture above doesn't make you feel down? Or this isn't you after a bad option trade? Trading losses occur with every trader. Reflections on mastering loss management and overcoming ego.
Newsletter – Insights for Tomorrow’s Profits

01 Aug 2024

Unlocking Trading Success: Mastering Loss Management and Overcoming Ego

I hope this picture above doesn’t make you feel down? Or isn’t you after a bad option trade ?

Read on and learn more about my current positions.

Hi,

In this newsletter I will report about my June and July results, highlighting key successes, my failures and areas for improvement. Next I will share as usual very transparently my current positions, providing rationale for each and how they align with overall investment goals. Finally I will be sharing expectations for the coming weeks, including what I think are potential market drivers and areas of opportunity.
My goal is to share my options trading journey and to help you learn and profit from options trading.

Trading losses occur with every trader. The net result of my portfolio during the first six months of 2024 were heavily impacted by one stock position going completely wrong. Even worse, I had to experience the unbearable truth that stocks do go to zero. And I was holding a to big position of the stock after selling naked puts and doubling down on the short put position, in an attempt to recover the losses. The stock was $FSR (Fisker), an EV stock which has provided me with plenty of profit in the last three years. I was assigned the (2000) shares in January 2024 and throughout the next six months, I couldn’t believe this company, selling beautiful EV cars, was going bankrupt. I was simply hoping something magic would make it revive.

And we all know, hope is a bad strategy, and this one has given me a net loss of about $9800 in my portfolio.

Meanwhile the last two months we were in the middle of relocation to Rome, Italy for a new job opportunity.

So now that the dust at our new place is settling, reflecting back on this rather huge loss, what did I learn from this?

My main take away is that I need to improve my loss management and not let ego and “hope” get in the way of sound decision-making. I am convinced that the true path to success is usually a journey through failure. And only when you learn to cope with the trading losses, and implement your personal system to prevent this from happening again, you can achieve true success.

Later on in this newsletter, I will elaborate more about how I intend to deal with future trading losses, how to recover and to overcome them.

But first, remember, for those eager to follow my real-time trades as I make them or all the results of my closing trades, our Discord channel remains active for immediate trade updates of my portfolio and options discussions. I am excited about this new approach and confident that this change will enhance our journey in options trading together.

I’m also excited to share that our options trading spreadsheets have been updated with enhancements to support our and your trading activities better. These improvements are designed to simplify the process of tracking and analyzing your trades, making it more efficient and user-friendly. The updates include an easier way to enter and account for assignment.

Our goal is to provide you with a streamlined tool that supports your decision-making process, enhancing your trading performance through meticulous record-keeping and analysis. I really appreciate your user feedback!

Content :

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1. Introduction

With the relocation on my mind, I kept a minimum of positions throughout June and July. And after FSR going practically to zero, by the end of June, I decided to close out the FSR position in my journal and take the loss.

July was a bit better with closing a couple of long held positions, but still under my monthly target…. This makes me think that after another year, I should rethink my trading goals or on my lack of consistent trading actions. I am working on a dedicated post about this. How do we, do you set trading goals? Do you reach your goals regularly? Are your trading target realistic expectations for your trading? Maybe if you have unrealistic expectations, you will also set unrealistic goals which can be very demotivating and counterproductive. Let me know your thoughts on this and how you set your goals. In case you want to read my initial strategy document first, here is the link again to “Developing my strategy and profit goals guide”.

Happy trading to you all!

2. Overall Market Overview (02 Aug 24)

As you know by now, when I prepare for trading or following the market and my positions, I focus on two aspects : the general trend of the market with the indexes, mainly the SPX and the volatility of the stocks with the VIX. The reason why is clear: the general trend of the market and stock volatility are essential for options traders because they directly impact options pricing, influence trading strategies, and offer opportunities for risk management and profit generation in the dynamic world of options trading.

And then again, I don’t want to over-analyse too: but basically the SPX trend and VIX levels are not far away.

Here is what the SPX Charts looks begin August 2024. The last time I reported (on May 3th) the market was at $5127. To notice is the fact that the SMA21 has crossed and dropped the SMA50.

SPX Chart – SPX $5471


Market outlook for next week : I must agree with the saying “nobody knows anything”. Although the graph doesn’t show any real signs of weakness, I prefer to be not too much directional.

VIX Chart – VIX USD $ 17.81

It’s hard to imagine the VIX staying below 20 for the reaming six months of 2024 … but again who really knows. I will be a very careful posture when adding new positions for now applying strict risk management rules.

2. TOCF Portfolio Monthly Recap & Trading Plan – June & July 2024

a. Results June & July 2024 & currently open positions:

Here is an overview for all accounts of the positions and results of last two months :

Results – Monthly performance

I’ll grade the performance of my trade plans as follows:

  • ✅ I could closed the position according to the trading plan
  • 🔶 Position did not go according to the trading plan, but after management I am satisfied with the results (positive or negative).
  • ❌ Position that was mainly mismanaged – I need to learn and avoid these positions.

6 positions were closed last 2 months. Details about all the trades are posted in the discord channels:

  • ❌ 26 June 24 – Closing 2000 shares of $FSR resulting in a net loss of -$9,949.00
  • ✅ 19 Jul Apr 24 – Closing 1 $PLR CC and getting assigned the 100 shares resulting in a net P/L of $115.00
  • ✅ 04 Jun 24 – Closing 1 $XBI STR resulting in a net P/L of $86.00
  • ✅ 01 Jul 24 – Closing 1 $BA STR resulting in a net P/L of $274.00
  • ✅ 01 Jul 24 – Closing 1 $AMD STR resulting in a net P/L of $172.00 with a ROC of 7,61% and an Ann ROC 130%
  • ✅ 31 Jul 24 – Closing $NVDA for a 1 day 1666% return resulting in a net P/L of $79,00 with a ROC of 4,63% and an Ann ROC 1666%

After getting settled at our new home in Italy, I have opened new positions in $NVDA, $CRWD, $MARA, $ON, $IWM, $EWW,and $INTC.

Other positions were mainly rolled out to 20 Sep 2024.

Portfolio Net Liq Values – 02 Aug 2024:

  • 🔴 Mexem : € 49250
  • 🟢 TastyTrade TT : € 7250
  • 🟢 TastyTrade WH : € 3636

Total value for the 3 accounts :

  • 🟢 in euros : € 59,331 (up since last report at $57,630 -> change : € +1701 or +2,9 %)

The open unrealised P/L is ($1333.30) at this moment.

Info – Interpretation of the exchange rate : I am from Europe and my base currency is euro. I am trading the US markets from a MEXEM account held in euros and from a Tastytrade account held in dollars. This means that I have and express my open positions and profits/losses of the US markets in dollars on both accounts. The Net Liq for me is only relevant in euros, taking into account the exchange rate (which sometimes is an advantage and sometimes not). This explains the difference in results between euros and dollars and for me the evolution of the Net Liq in euros is what matters ultimately.

b. Reflection : Mastering Loss management and overcoming Ego

Now that I have shared my current portfolio situation, let’s reflect on my losses during the last two months.

The FSR position turned out to be a fiasco, a total loss, bankruptcy is possible. An important lesson is learned here. A stock can go to 0. I am think to set a hard stop-loss from now on, because hope is usually the worst strategy.

Here are the key take-aways of my reflection up front :

  • Always view losses as learning experiences.
  • You shouldn’t overly focus on their win/loss ratio; it’s possible to lose more trades than you win and still be successful (although in our system that is practically not the case).
  • You can use trading losses to improve by implementing stop-loss orders or a predetermined close percentage, analyzing each loss, and maintaining a trading journal.
(1) Is the win or loss ratio in trading important?

Let’s begin by examining the win and loss ratio. This win ratio is calculated by dividing the number of winning trades by the number of closing trades. For instance, a trader with 80 profitable trades out of 100 closed trades has a win ratio of 80%.

In our all in trading options journal spreadsheet this ratio is calculated based on the journal entries and looks like this for the period of :

However, it is misguided to focus solely on this win ratio in pursuit of a high(er) number. A long-term tastytrader might have a win ratio of only 75%, but because their profits on winning trades significantly exceed their losses on unsuccessful ones, they can still achieve overall positive success.

Traders should accept losses as a part of the business. Instead of trying to avoid them, they should learn from these experiences.

Regardless of whether a trader is new to the field or has been in the markets for years or decades, they will encounter both positive and negative trades. Many traders believe that more is learned from losses than from winning trades, as losses compel traders to focus and analyze what went wrong. I can confirm that this is true.

(2) How do we use losses to improve our trading ?

Losses in trading can be a valuable learning experience. But how do use them to improve. Accepting that they are inevitable is a first and important step. Although it’s difficult, the sooner you embrace this reality and try to learn from losses, the better off you’ll be.

After a big loss, I may be a good idea to take a break and stop adding new positions (certainly not in an attempt to recover as fast as possible) to reassess your strategy and position sizes. Start small when you return to rebuild confidence, but DO return (the true winner is the one who perseveres). The investing race is a marathon, not a sprint. Recognition that all humans fall short of perfect is the first step to knowing yourself and your limitations.

On a practical level, here are several ways that I believe we have to consider to help us improve our trading using losses:

  • Accept Responsibility: Don’t hide from losses or blame external factors. Taking ownership of your trading decisions is crucial. This means recognizing that you control your trades and are responsible for improving your risk management, trading strategies, and goals. So take action to work and improve your management, strategies and goals.
  • Review Position Sizing: Proper position sizing is essential in options trading yet often challenging. Many traders risk too much on a single trade, jeopardizing their capital. A solid position sizing strategy involves risking only a small percentage of your trading capital per trade. This can help limit individual trade risk and overall market exposure.
  • Analyse Each Loss: Although it’s not pleasant, a thorough analysis of each loss is vital. Successful traders emphasize the importance of brutally honest evaluations. Understanding why a trade failed can provide valuable insights and will help refine your approach.
  • Review Your Exit Strategy and use a Stop-Loss Level: An effective exit strategy can differentiate between winning and losing trades. Implementing a stop-loss level for each trade is crucial. Whether you use a specific dollar amount or a percentage, having a predefined exit point can prevent emotional decision-making. Most trading platforms offer stop-loss orders, which can be set when entering a trade. In my case, I have the habit to mechanically execute to close my winners at 50% but I hardly mechanically close my losers. I have the tendency to try to ‘solve’ the losers…
  • Control Your Emotions: Fear and greed are powerful emotions that can negatively impact trading. Fear of loss and the greed for more profits can lead to poor decisions. Use tools like stop-loss and take-profit orders to make objective and mechanical trading choices. Be aware of revenge trading and learn good tricks to avoid it.
  • Use a Trading Journal: Keeping a trading journal is a common practice among successful traders. Record details of each trade, including entry and exit levels, outcomes, and other relevant data. Reviewing this journal can provide insights into your trading patterns and help you make informed adjustments.
  • Ask Simple Questions: Reflecting on your trades can reveal areas for improvement. Consider questions like :
    • How much did I risk on this trade?
    • Did I respect my maximum risk per trade?
    • Did I enter too early or exit too late?
    • Did I diversify enough?
    • What market signals did I overlook?
    • What changes can I make to avoid similar mistakes in the future?
    • and you can think about more and better questions

(3) Overcoming ego problems?

Another critical aspect of trading, especially for options traders, is overcoming ego when taking losses.

Ego can often cloud judgment and lead to irrational decisions in an attempt to prove oneself right. It is essential to separate personal pride from trading decisions. Admitting a mistake and cutting losses short can be difficult but is necessary for long-term success.

Humility in trading allows for objective assessment and learning, paving the way for more informed and less emotionally driven decisions. By acknowledging that losses do not define your abilities but are part of the trading process, you can maintain a clear and focused mindset, crucial for navigating the complexities of options trading. Sharing my trades (winners and losers) transparently and open helps me with this ego aspect of trading.

Conclusion : these were some reflections on how I believe we all can, by accepting and learning from losses, turn them into opportunities for growth and improvement in trading. So it’s my intent to embrace the process of continuous learning and refinement to become a more resilient and successful trader.

Please, don’t hold back and give me your thoughts in the comments.

c. My Trading Plan for upcoming week:

At portfolio level :

  • The theta level is not yet back into the ‘green’ target-level. So this is an action point for the coming days and weeks. I will look for opportunities to bring back up the portfolio theta, keeping in mind the low VIX.
  • I have been aiming to keep a descent delta/theta ratio. I have corrected the spreadsheet in a way that holding long stock is now also part of the calculation making the Spy B weighted delta correct for the whole of the positions. The sum of the SPY Beta Weighted Deltas of my three accounts is € 29 (meaning if the SPY goes up $1, my portfolio value will up € 29 and vice versa).
  • I am aiming for a 1:2 ratio (or lower) with neutral delta/theta. After closing many positions and rolling out in time, the delta/theta ratio is at 0.56 at the moment. The ratio is good but the theta value itself is a bit too low.
  • Further I will focus on diversification in sectors and option strategies.

As you have seen above, most of my open positions are in the red. For the stocks that I own, I will continue battling to get the assigned stock back up to profitability by looking for opportunities for covered calls.

General Trading improvements for the coming months:

In case you missed it my strategy document or you hadn’t had the time yet, here is the link again to “Developing my strategy and profit goals guide”.

I have learned that navigating the unpredictable waters of the stock market demands a solid risk management strategy, even though losses remain an inherent part of trading. Understanding that minimizing losses and their impact is the cornerstone to longevity in trading is crucial. I have experienced the impact of a few big losses on the overall result of the portfolio. I will review my strategy document in September and see if I need and where I will have to (fine) tune.

3. Weekly Watchlist

I will obviously keep my attention to the open positions I have :

$SBUX, $QCOM, $S,$ON, $CRWD, $AMD, $SOFI, $PYPL, $PLTR, $NKE, $MRVL, $T, $SOXL and $NIO.

Keeping a keen eye on interesting movements of the following quality stocks :

$FTNT, $AAPL, $MSFT, $AI, $TSLA, $GOOGL, $AMZN

4. Other stuff – info & links
  • I have been receiving a couple of questions of users of the spreadsheet how to get the updated versions. Just to be clear, the normal updates of a spreadsheet are always free and the best way to get them is by making an account when buying and subscribing to the newsletter to get info about possible updates. This will allow you to always download the updates. Take a look at this article which explains how : https://www.tradingoptionscashflow.com/benefits-of-creating-a-tocf-shop-account/ . If you bought the earlier version on Etsy, drop me an email and I’ll give you a free download of the updated version at no extra cost.
  • I have noticed that users often ask the same questions about the spreadsheets I provide via the webshop. Hence the reason why I have started a page with Frequently Asked Questions (FAQ) – And if you have any specific questions, please do take a look at the FAQ Page about the use of our spreadsheets.
  • As a reminder, you can always follow my opening and closing trades via the discord channel. I’ve made the decision to refrain from duplicating content from the Discord channels here in my newsletter. This in order to optimize my time and focus and provide the most value to you, primarily on improving my trade management skills and sharing my experiences with you all. When there is a particular trade I feel warrants a comprehensive analysis, I will definitely include all pertinent details and figures in the newsletter.

Whenever you’re ready, here are 3 ways I can help you to improve your option trading:

  1. For the option traders still looking for a Trading Options Spreadsheet to track their results and improve their trading, check out the EASY “All In Trading Options Journal Spreadsheet”: the ONLY option trading journal designed to focus on parameter-based options trading and account management, as probabilistic-minded options traders like me like it. Checkout this article about the spreadsheet, the multiple tutorials about the spreadsheet on my Youtube or read about the spreadsheet directly available in our webshop
Best Options Trading Journal Spreadsheet for the highly profitable option trader looking to learn from his trade journal
  1. If you are not a Free member of our discord yet : In our discord channels, we team-up with other like-minded option traders, with the aim to support each other and share valuable insights and ideas. I provide live comments, trade alerts, educational info and tools via our discord room. Join anytime ! here: http://discord.gg/cGW6xH4RNT
  2. In case you haven’t found me on social media: I suggest to follow me on X @L2TradeOptions and on Youtube @TradingOptionsCashflow to pick up my latest content.

I hope that providing some insights in my trading and my thoughts, will trigger some thoughts and maybe ideas that will help you with your trading and helps to become an even more profitable options trader. Don’t hesitate to contact me to talk options.

Thanks for reading the TOCF Newsletter, great and happy trading!

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Let’s generate cash flow together !

P&K

Please do leave your thoughts below in the comments.

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